In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they'd never buy.
This week our interviewee is Nitin Bajaj, portfolio manager at the Silver-rated Fidelity Asian Values (FAS).
Which Sector Shows The Biggest Promise in 2022?
My investment process is built on owning high return on capital employed business models, run by good management teams and available with a margin of safety. So for a stock to be attractive to me, all the three boxes have to be ticked: business, management and valuation. Currently, I’m finding small cap value stocks in China and private sector Indian banks provide the risk-reward payoff and the fund is positioned that way. However, as is often said, a forecast tells you more about the forecaster than the future.
What's The Biggest Economic Risk Today?
In my view, it depends on the time frame but the immediate risk in my opinion is twofold. The first is the probability and depth of recession. The second is the medium- to long-term implications of experimental monetary policies we have seen over the last few years by governments and central banks of Western economies.
Describe Your Investment Strategy
My process is based on owning good businesses run by competent and honest people which are available at margin of safety. This can happen because these businesses are yet to be discovered by most investors, they are going through a temporary setback, the market is infatuated with a "fad" and ignoring businesses that do not fit the narrative, or may other reasons.
My job as an investor is to get a deep understanding of businesses to find these hidden gems or separate facts from emotions during periods of market boom/panic. That differentiates between temporary setbacks and the permanent impairment of a business.
As a result, my investment process is focused on finding these valuation anomalies where our understanding of the business leads us to have a differentiated view of what the business is worth versus other investors.
Which Famous Investor Do You Admire?
There have been three standout investors that have influenced me. I have learnt a lot from reading and observing the actions of Warren Buffett and Charlie Munger; the clarity of thought and discipline to stay within their circle of competence and their ability to ignore market noise and stay focussed on what matters long term.
Professor [Joel] Greenblatt’s book The Little Book That Beats The Market had a significant impact on my thought process on value companies with high return on capital. And while I was an analyst, I observed the way Anthony Bolton gathered and pieced together pieces of a puzzle to form an investment thesis, but with an open mind.
Beyond these three, I have also learned a lot from the analyst team at Fidelity over my career. In investing, conviction comes from understanding businesses better than others; and the analyst team at Fidelity has helped me get a competitive edge.
Name Your Favourite "Forever Stock"
I don’t think there are any forever stocks. Capitalistic forces of competition and innovation will erode competitive advantages, managements change and consumer preferences, regulations, societal beliefs all change with time. So I think you have to stay paranoid even if something looks like a great business for the long term.
What Would You Never Invest In?
Dishonest people.
Growth or Value?
I think the fundamental difference between growth and value investors is the source of margin of safety. For growth investors, it is the future potential of the business while for value investors it is a comparison of current price vs hard assets/cash or current earnings power (provided it is normalised for short term business cycles).
In that process you try to ascertain disruption risk, agency cost of corporate management teams, taxation friction etc. but the key is that return of capital is as important as return on capital. I am very much a bird in hand is better than a few in the bush – so definitely Value.
House or Pension?
I have neither. Most of my savings are in the funds I manage, or in Fidelity stock.
What Are Your Thoughts on Crypto?
Blockchains or distributed ledgers will probably have some role (or even a big role) in future but I feel it is too early to have a strong opinion one way or the other. It is something you do not want to ignore and want to keep learning about, but I feel it’s not mature enough to risk investors capital on it yet.
What Can be Done to Increase Diversity in Fund Management?
This is a very tough one. The problem is not that the industry doesn't believe in diversity of talent, it's that biases built into our education system lead to two things: a less diverse applicant pool; and people bringing biases they picked up through life to work (all of us are equally guilty of this). These are very difficult issues to solve.
We see some attempts of regulatorily mandating board compositions or shareholders forcing these on companies. I see the logic in this but this is a road to be careful about as it can have unintended consequences, like impacting a culture of meritocracy, or building prejudices against new mandates.
I work in Fidelity's Singapore office, where the investment team is well represented with different ethnicities, genders and sexual orientations. And this was done without sacrificing meritocracy. I am not sure how this was achieved but it goes to show that right corporate culture can lead to diversity without making a big deal about it.
Have You Ever Engaged With a Company and Been Particularly Proud (or Disappointed) in the Outcome?
I would say there have been various successes and failures in our engagements with managements on different topics. However, an area of frustration has been our engagement regarding capital allocation with a range of companies in [South] Korea.
Korea has some of the most interesting and undervalued businesses I have come across but, very frustratingly, a lot of Korean companies have not started treating minority shareholders as partners yet. This is an ongoing effort at Fidelity and hopefully we can contribute positively to better capital allocation decisions by Korean corporates over time.
What's The Best Bit of Advice You’ve Ever Been Given?
Never act in panic. Money management can often become an overly emotional job where greed or fear start to dictate your decisions. What others do starts becoming more important than what you think of the business and margin of safety. I believe avoiding these panic decisions is key to both capital preservation and growth over time.
What Would You Be if You Weren’t a Fund Manager?
No idea. But when I was at business school my first preference was to work in sports marketing or sports franchise management.
